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MARKETING STRATEGY MKT 760

WHAT IS STRATEGY?
Strategy is defined as the policies and key decisions adopted by management that have major financial impacts. These policies and decisions usually involve significant resource commitments and are not easily reversible. Strategy is concerned with strategic decision making. Strategic decision involves creation of a strategy, change of a strategy or retention of a strategy. McDonald (1996) identified four characteristics of strategic decisions. First, they are concerned with the long-term orientation of the organisation, rather than day-to-day management issues. Second, strategic decisions define the scope of the organisation's activities, selecting what it will do and what it will not do i.e. types of industries, product lines and market segments the firm competes or plans to compete with.

Third, strategic decisions match the organisation's activities with the external environment. For example, there is no point in setting objectives and devising strategies that are unconnected with the realities of the business environment. Fourth, strategic decisions match the organisation's activities with its resource capacity. For example, there is no point in pursuing strategies that cannot be implemented using available resources.

Strategic marketing decisions are made away from the scene of the marketing warfare and has to do with the overall disposition of marketing forces. Tactical marketing decisions are made in the heat of the marketing battle, often in direct response to a competitor initiative. For example, military strategy would suggest that you should not engage in a frontal assault on a powerful enemy since the chances of winning the battle are very poor. It makes sense to engage in an outflanking strategy or to engage in guerrilla warfare against such an enemy. Similarly, the chances of achieving success by attacking a market leader by adopting a similar marketing mix are slim. An outflanking strategy such as (developing a next generation product) or a guerrilla strategy such as (picking off niche markets one by one) is more likely to succeed.

What is Strategic Process


Strategic process refers to the manner in which strategy is formulated. There are several approaches. First, the rational approach, making use of tools such as SWOT analysis and portfolio models. Second, the flexible approach which employs multiple scenario planning. The creative approach reflects the use of imagination in planning. The behavioural approach reflects the influence of power, politics and personalities. Finally, the incremental approach is based on small adjustments or changes to previously successful strategies. In this course we shall be concerned with rational approach i.e. how to formulate strategies using the tool SWOT analysis.

Another Definition of Strategy


According to Walker et al (2006), A strategy is a fundamental pattern of your present and planned objectives, resource deployments and interactions of an organisation with markets, competitors, and other environmental factors. In other words, what the authors are saying is that a strategy consists of a pattern of your present and planned objectives; a pattern of your present and planned resource deployments; a pattern of the present and planned interactions of an organisation with markets, competitors and other environmental factors.

On the whole, this definition suggests that a strategy should specify: What objectives to be accomplished Where? i.e., on which industries and productmarkets to focus; How? i.e., which resources and activities to allocate to each product-market to meet environmental opportunities and threats and to gain a competitive advantage. All of these constitute key decisions that have major financial impact.

A good strategy summarises the who, what, where, when, and how questions about a company activities for building future services. Who are your target buyers? What makes your company unique in the market? (Sources competitive advantage such as enjoying superiority on one or two elements of the marketing mix.) Where will you focus your efforts to build growth?(That is on which industries / product markets to concentrate) When will you achieve the specific milestones? How far do you intend to move the company from its present position. (That is to increase our revenue by 20%)

THE COMPONENTS OF STRATEGY (Corporate Strategy) ) A well developed strategy contains five components irrespective of its level. Strategic Scope The strategic scope of an organisation refers to the breadth of its strategic domain- that is the number and types of industries, product lines, and market segments it competes in or plans to enter. Decisions about an organisations strategic scope should reflect managements view of the firms purpose or mission. Goals and Objectives Strategies also should detail desired levels of accomplishment one or more dimensions of performance- such as sales volume growth profit contribution or (return on investment) over specified periods of time; for each of those businesses, and product-markets and for the organisation as a whole.

Resource Deployments Every organisation has limited financial and human resources. Formulating a strategy also involves deciding on how those resources are to be obtained and allocated across businesses, functional departments and activities within each business or product-markets.

Identification of a sustainable competitive advantage (upon which to build the Product position). One important part of any strategy is a specification of how the organisation will compete in each business and productmarket within its domain. How it can position itself to develop and sustain a differential advantage over current and potential competitors? To answer such questions, management must examine the market opportunities in each businesses and product-market and the companys distinctive competences and strengths relative to its competitors.

Synergy The strategy must show how resources can be used to enable sharing of information and expertise across the different businesses of a company in order to cut cost and maximise revenue. Synergy is a result of sharing resources across two or more activities resulting in less cost so that the whole result is greater than the sum of the results of each business unit.

THE HIERARCHY OF STRATEGIES Rather than a single comprehensive strategy, most organisations have a hierarchy of interrelated strategies each formulated at different levels of the firm. There are three major levels of strategy in most large multiproduct organisations. These are Corporate Strategy, Business Level Strategy and Functional Strategies (e.g. marketing strategy, RD strategy, Human resource strategy and operations strategy). Functional strategies are focused on a particular product-market entry.

Strategies at all levels contain the five components mentioned earlier, but because each strategy serves a different purpose within the organisation, each emphasises a different set of issues. Refer to p.10 Walker Corporate Strategy The essential questions at this level include: What business(es) are we in? What businesses should we be in? and What portion of our total resources be devoted to each of these businesses to achieve organisations overall goals and objectives?

Business-Level Strategy (Competitive Strategy) The focus of business-level strategy is on how a business unit competes within its industry. And this takes us to takes us to the issue of identification of sustainable competitive advantage. What distinctive competences can give the business unit a competitive advantage? And which of those competences best match the needs and wants of the customers in the businesss target segments? For example, a business with low-cost sources of supply and efficient, modern plants might adopt a low-cost competitive strategy while the one with a strong marketing department and competent sales-force may compete by offering superior customer service.

Marketing Strategy The primary focus of marketing strategy is to effectively allocate and coordinate marketing resources and activities to accomplish the firms objectives within a specific product-market. Therefore, the critical issue concerning the scope of marketing strategy is specifying the target market(s) for a particular product or product line. Next, firms seek competitive advantage and synergy through a wellintegrated programme of marketing mix elements (primarily the 4Ps of product, price, place and promotion) tailored to the needs and wants of potential customers in that target market. The essence of strategic planning at all levels is identifying threats to avoid and opportunities to pursue. The primary strategic responsibility of any manager is to look outward continuously to keep the firm in step with changes in the environment.

WHAT ARE THE DIFFERENCES BETWEEN STRATEGY AND TACTICS?


A strategic decision involves the creation, change, or retention of a strategy, and tactical decisions are made often in direct response to a competitor initiative. In contrast to a tactical decision a strategic decision is usually costly in terms of the resources and time required to reverse or change it. The cost of altering a wrong decision may be so high as to threaten the very existence of an organisation. Normally, a strategic decision has a time frame greater than one year; sometimes decades are involved. Tactical manoeuvres tend to be sufficient to cope only with short-term and localised conditions and circumstances. Broadly speaking, strategic decisions are important decisions that will affect the direction of the business for a long time. It has also a considerable impact on the way in which organisational resources are allocated. In other words, it has a significant resource commitment.

McDonald (1999) made the time the key factor distinguishing strategic planning from tactical planning. He defined strategic plan as a plan that covers a period beyond the next physical year, usually three to five years, while a tactical plan goes into great detail about actions to be undertaken in the short term (usually one year or less). Tactical marketing or plan targets existing markets and segments. Note that tactical marketing is synonymous with operational marketing. Tactical marketing or plan is concerned with doing what we already do as effectively and efficiently as we can.

Strategic marketing or strategic decision is concerned with identifying important changes taking place in the market and in business environment and working out how the organisation should respond. There is a difference between effectiveness and efficiency. Effectiveness means doing the right things. For example, to be effective, a marketing organisation must have a portfolio of products and services that are well designed to meet the needs of the market. A simple definition of efficiency is doing things right. For example, to be efficient a marketing organisation must monitor the performance of the sales force against target, and take corrective action where underperformance is detected. It is quite possible to be effective but inefficient- for example, to have a poorly motivated or poorly motivated or poorly trained sales force trying to sell an excellent portfolio of products. The principal realm of strategic marketing is marketing effectiveness.

WHAT IS STRATEGIC MARKETING?


As we all know, conditions affecting marketing success seldom stay the same. Such conditions include the following: competitors, government regulations, the state of the national economy, technologies and customer needs. They do change over time. Strategic marketing is therefore concerned with identification of changes in the market and business environments, and then ensuring that the firm is well prepared to meet with them. The firm looking out of a strategic window watches these changes and assigns some requirements for continued success in each market. There is only a limited period when the fit between the requirements of a particular market and the firms competence is at optimum. At these times, the strategic window opens and the firm should be investing in this market. In some subsequent period, the firm will find that the evolutionary path of this market is such that it can no longer be effective and efficient in serving the market. At this point, it should consider disinvestment and shifting its resources to areas of growing opportunities.

Strategic marketing goes beyond looking at day-to-day marketing battleground to reflect upon key changes that lie ahead and deciding on how best the firm will respond to them. However easy this may sound, in principle, many firms, particularly small and medium sized enterprises (SMEs) find it difficult to put into practice.

Strategic marketing means looking at the whole of a companys portfolio of products (not business) and markets, and managing the portfolio to achieve the companys overall goals. The result could be that decisions are made not to invest in certain products or markets, in order to release resources to be invested elsewhere in the portfolio, where the opportunities are judged to be greater. Note that strategic marketing operates at the level of business unitat the level of products and markets.

The Six Key Points Involved in Corporate Strategy: Corporate strategy involves the entire organisation. Corporate strategy concerns itself with the survival of the business as a minimum objective and the creation of value added as a maximum objective. Corporate strategy covers the range and depth of the organisations activities. Corporate strategy directs the changing and evolving relationship of the organisation with its environment. Corporate strategy is central to the development of sustainable competitive advantage. Corporate strategy development is crucial to adding value.

Strategic marketing management shares several of these characteristics. In particular the development of sustainable competitive advantage is central to strategic marketing. There is very strong case that strategic marketing is crucial to adding value on value-based marketing. However, strategic marketing does not involve the entire organisation nor does it cover the full range and depth of the organisations activities. The focus of strategic marketing is on products, markets and management of relationships with customers both actual and potential.

SUMMARY Strategy is an overused word. In marketing terms, its use should be restricted to important decisions that will have a major effect on the future of the organisation. Strategic marketing decisions are concerned primarily with ensuring the effectiveness of the marketing organisation in the competitive struggle. In other words, the principal realm of strategic marketing is marketing effectiveness.

UNDERSTANDING THE COMPETITIVE ENVIRONMENT.


Introduction Any form of business planning can be thought of as a process of understanding the current position (situation audit), deciding on what we want to achieve (objective setting) and deciding how those objectives are to be achieved (strategy formulation). Situation audit involves the process of gathering and analysing relevant information in other to understand the resources available to the firm and circumstances outside the firm that affect its ability to achieve its objectives. This takes us to analysis of marketing environment. When we talk about marketing environment, we are concerned with circumstances outside the firm. The marketing environment consists of all the factors outside the organisation that may have an influence on the achievement of its marketing objectives. It is customary to reduce marketing environment into a manageable size- Competitive environment and Macro-environment.

Each of these can be further subdivided. The Competitive environment (or industry environment) or micro-environment comprises those factors which the organisation comes into closest contact; factors that have a rather obvious and immediate impact on its success. The competitive environment is usually further subdivided using Porters (1980) classification framework into direct competitive rivalry, the threats from new entry competition, the threat from substitutes, the power of the buyers and the power of the suppliers. The macro-environment comprises factors outside the immediate competitive environment, some of which may have immediate effect but many of which have longer term and more insidious effect on the success of the business. We start by looking at the competitive environment.

ANALYSING THE COMPETITIVE ENVIRONMENT USING PORTERS FIVE FORCES


A widely accepted method of classifying the key factors in the competitive environment was developed by Porter in 1980. This classification method is referred to as Porters five forces. The five forces involved are direct competitive rivalry, the threat from new entry competition, the threat from substitutes, the power of buyers and the power of suppliers. The key feature of the framework is that it extends the concept of competition, and the competitive environment beyond those businesses that supply products and services that are direct rivals with our own product range. Originally, industry analysis using five forces was developed as a method of analysing the relative profitability of different industries. Such analysis is of special intrinsic interest to economists who may wish to evaluate the attractiveness of different industries that they wish to enter.

Initial expectations were that the profitability of an industry sector would be directly related to the intensity of competitive rivalry within it. The more fiercely firms within the industry compete with one another the more aggressively one would expect them to set their prices, resulting in lower profit margins and lower overall profitability. However, it turns out that direct rivalry is not the whole story. The other four of the five forces can also influence profitability and so affect the competitive environment and thus the overall attractiveness of an industry sector. The intensity of competition within an industry increases under the following condition: Where there is a high risk that one or more new firms will enter the market to compete with the incumbents. Where there is a high risk that a new product technology- a substitute will be developed that provides the same benefits advantageously (for example at lower cost).

Where supplier businesses exert considerable power over the industry. Where customers (consumers or buyer businesses) exert considerable power over the industry. On the whole, an industrys attractiveness at a point in time can best be judged by analysing the five major competitive forces. For example, the market for mobile communication has grown rapidly over the years, but is the industry attractive? This question can be answered by analysing the five competitive forces. The five competitive forces collectively determine an industrys long-term attractiveness. The mix of the forces explains why some industries are consistently more profitable than others and provides further insights into which resources are required and which strategies should be adopted in order to be successful. (i.e. externally-outside the firm).

The Threat of New Entry Competition. 1. How likely? 2. How seriously?

Power of Suppliers.
1. How powerful? 2. How do they influence the market?

Direct Competitive
Rivalry. 1. Identify your direct rivals 2. Assess their strengths, weaknesses and strategies.

Power of Buyer.
1. How powerful? 2. How do they influence the market?

The Threat from


Substitutes. 1. How likely? 2. How serious?

Direct Competitive Rivalry Direct competitive rivalry occurs between different firms producing a product or service that consumers consider to be similar. For example, direct competitive rivalry occurs between automobile manufacturers producing cars in the family car market such as Ford Mondeo, the Toyota Avensis etc. Having established who are the key direct rivals, it is appropriate to undertake a detailed analysis of their strengths and weaknesses and identify and evaluate their marketing strategies. There are many tools that can be used in diagnosing the strategic situation of ones own firm. As long as there are substantially publicly owned businesses, there will be sufficient information in the public domain to make such analysis meaningful. As a rule, the fewer direct rivals there are, within an industry, the less intense the competitive rival will be.

The Threat of New Entry Competition Firms that do not compete in the market but may do so in the future pose the threat of new entry competition. For example, a firm that is into diamonds may decide to exploit its reputation for diamonds (diamonds enjoy the reputation of being the ultimate luxury product) by entering other luxury goods markets, for example the market for designer clothing, handbags and cosmetics. It becomes a strategy. This would represent a threat to the established competitors.

A key factor affecting the extent of the threat posed by new entry competition is the level of barriers in an industry. Entry barriers are those that make it difficult for a firm to enter a new industry. For example, the substantial sunkcost investments that automobile manufacturers have in plant and equipment would make it very expensive for a new entrant to achieve competitive parity. Legal barriers such as patent protection can also represent entry barrier. If the incumbent firms own well known (established) brands, then this can also create an entry barrier. An industry in which there are frequent price wars between the incumbent firms is less attractive to new entry competition than one in which prices tend to remain stable for long periods.

The Threat from Substitutes Beyond the firms with which you compete directly, and others that may enter the market, there is the threat that someone may develop a new product or service that renders your own product obsolete. This is the process of substitution, most frequently found where a new technological solution supersedes an older one. For example, the manual typewriter was superseded by the electric typewriter which was in term rendered obsolete with the advent of word-processing equipment. Word processor was replaced by the general purpose personal computer which can run word processing software but has many other applications besides

The Power of Suppliers If the supplier can also threaten to integrate forward i.e., to become a direct competitive rival, then this is a serious strategic issue. Forward integrative diversification occurs when a company in your supply industry decides to enter into direct competition in your market. This would happen for example, if a supplier of mobile phone components (keypads, screens, circuit boards and so on) decides to manufacture and market complete mobile phones in competition with Nokia and Motorola.

The Power of the Buyers Finally, we have the influence of buyers on competition within an industry. The power of buyers increases as buying is concentrated in only a few hands, particularly if the products bought are undifferentiated. High levels of demand are not uncommon in business-to-business markets. In the extreme case, there may only be a single buyer (this is known as a monopoly), but more commonly in business-to-business markets one finds the situation of only a few buyers (known as oligopsony). The global automotive components industry, for example, faces conditions of oligopsony, since there are only a handful of major automobile manufacturers.

SUMMARY The essential message of the analysis of competitive environment has been that to achieve above average business performance, a firm must gain a sustainable competitive advantage over its rivals, and that the analysis of the competitive environment is central to the identification of such a sustainable advantage. It is logical to focus on direct rivals, and on the extended competitive environment, since it seems obvious that this is where a competitive advantage must be created

RESOURCED-BASED VIEW OF THE FIRM In recent years a slightly different approach to competitive strategy has been developed, summarised as the resource-based view of the firm. In the resource based view, the source of competitive advantage for an organisation is said to come from internal resource advantage rather than from competitive positioning advantages.

TARGET MARKETING PROCESS


There are three steps in target marketing process. These are market segmentation targeting and positioning. MARKET SEGMENTATION: Each market is filled with many more customer groups and customer needs than one company can possibly serve in a superior fashion. The task calls for market segmentation. Market segmentation is therefore the process of dividing a market into distinct groups of buyers with different needs, characteristics or behaviour who might require separate products or marketing programmes. A segment consists of consumers who respond in a similar way to a given set of marketing efforts. In a car market, for example, consumers who choose the biggest, most comfortable car regardless of price make up one market segment. Customers who care mainly about price and operating economy make up another segment companies are wise to focus their efforts on meeting the distinct needs of individual market segments.

TARGET MARKETING

The second step in the target marketing process is called target marketing. Target marketing therefore may be defined as the process of assessing the relative worth of different market segments and selecting one or more to enter. Once the firm has segmented its market, and the relative worth of different segments identified, it has to consider what part of the market it wants to serve. The firm can serve one or more of many segments in a given market.

A target market consists of buyers who share common needs or characteristics that the firm wants to serve. Because buyers have unique needs and wants, it is proper for a seller to view each buyer as a separate target market. Ideally, a seller might design a separate marketing program for each buyer but it may not be worthwhile. Do you know how much it will cost to manufacture a separate car for people who are above 7feet; you have captured a lot of markets. Generally, companies can target very broadly, very narrowly or somewhere in between. More discussion on this will be made later under Targeting Strategies.

CRITERIA FOR EVALUATING MARKET SEGMENTS Typically, the criteria for selecting appropriate target markets are: segment size, segment growth rate, segment compatibility with the firms competences, segment compatibility with the firms mission and objectives. Segment size: All things being equal, a large segment offers more opportunities than a smaller segment. Growth rate: A fast growing segment offers more opportunities than a stow-growing segment everything being equal.

Segment Competitiveness: Large and fast-growing market segments typically attract more competitors, perhaps large and more powerful competitors than small and slow-growing segments

Segment Compatibility with the Firms Competences: The SWOT analysis should have highlighted key strengths and weaknesses compared to rivals. Market segmentation analysis must have identified the specific characteristic of demand in each market segment. It is important to try to match the firms strengths to the requirements of the target segments. There is no point in targeting a highly price-sensitive market segment if the SWOT revealed that your cost position is far worse than that of your key rivals in the same segment. There is no point in targeting a high quality sensitive market segment if your production department cannot match or better competition on product quality.

Segment Compatibility with the Firms Mission: Finally, target market selection should take account of the strategic direction that the firm intends to take, not just its current position. If the firm has a reputation for low cost and mediocre quality but has put in place a concrete strategy to make it an industry leader on quality, then over an appropriate timescale it will adjust its target market selection away from the lowcost segment toward the high quality segment. Naturally, this will require the implementation of some creative marketing communications strategies to convince customers in the target segment of the quality of the products

Selecting Target Market Segments After evaluating different segments, the company must now decide which and how many segments it will target. A target market segment consists of a set of buyers sharing common needs or characteristics that the company decides to serve. The chosen ones must be targeted. Targeting Strategies or Coverage Strategies: Companies can target very broadly-undifferentiated marketing, very narrowly (micromarketing) or somewhere in between-(differentiated); and concentrated marketing (or niche marketing). Note that only very large firms such as IBM (Computer market), General Motors (Vehicle market) and Coca cola (Soft drink market) can undertake full market coverage. They can cover a whole market in two ways: through undifferentiated marketing or differentiated marketing. Lets take a look at undifferentiated marketing.

In undifferentiated marketing, the firm ignores segment differences and goes after the whole market with one offer. It designs a product and marketing program that will appeal to the broadest number of buyers. It relies on mass-distribution and mass-advertising. It aims to endow the product with superior image in peoples minds. Undifferentiated marketing is the marketing counterpart to standardization and mass production in manufacturing. The narrow product line keeps down costs of research and development, production, inventory, transportation, marketing research, advertising and product management. The undifferentiated advertising programme keeps down advertising costs. Presumably, the company can turn its lower costs into lower prices to win the price sensitive segment of the market.

Differentiated marketing means complete market coverage with different products for each segment. General Motors does this when it says that it produces a car for every purse, purpose and personality. IBM offers many hardware and software packages for different segments in the computer market. By offering product and marketing variations to segments, companies hope for higher sales and stronger position within each market segment. But differentiated marketing also increases the costs of doing business. A firm usually finds it more expensive to develop and produce say 10 units of 10 different products than 100 units of one product. Developing separate marketing plans for separate segments require extra research, forecasting etc.

Concentrated marketing: A third market coverage strategy, concentrated marketing (or niche marketing), is especially appealing when company resources are limited. Instead of going after a small share of a large market, the firm goes after a larger share of one or a few segments or niches. For example, Oshkosh Truck is the worlds largest producer of airport rescue trucks and front- loading mixers. Again, Volkswagen concentrates on the small car market and Porsche on the sports car market.

Steiner Optical captures 80% of the worlds military binoculars market. Whereas segments that are fairly large and normally attract several competitors, niches are smaller and may attract only one or few competitors. Through concentrated marketing, the firm achieves a strong market position because of its greater understanding of consumer needs in the niches it serves and the special reputation it acquires. It can market more effectively by fine-tuning its products prices, and programs to the needs of carefully defined segments. It can also market efficiently, targeting its products or services, channels, and communications programs toward only the consumer that it can serve best and most profitably. Niching offers small companies an opportunity to compete by focusing their limited resources on serving niches that may be unimportant to or overlooked by large competitors. The disadvantage is that a particular market segment can turn sour, therefore, many companies prefer to operate more than one segment leading to the development of other patterns of target marketing selection in addition to the ones we have mentioned.

Micro-marketing is the practice of tailoring products and marketing programs to suit the taste of specific individuals and locations. Rather than seeing a customer in every individual micro marketers see the individual in every customer. Micro-marketing includes local marketing and individual marketing. Local marketing involves tailoring brands and promotion to the needs and wants of local customer groups- cities, neighbourhoods and even specific stores. Individual marketing or one-to-one marketing or customized marketing: In the extreme, micro-marketing becomes individual marketing- tailoring product and marketing programmes to the needs and preferences of individual customers. for example, the tailor custom-made suit, the cobbler designed shoes for the individual, the cabinet-maker made furniture to order.

CRITERIA FOR EFFECTIVE SEGMENTATION There are many ways to segment a market but not all segmentation is effective. To be useful, market segmentation must be: Measurable: The size, purchasing power, and other characteristics of the segments can be measured. Substantial: The segments are large and profitable enough to serve. A segment should be the largest possible homogeneous group worth going after with a tailored marketing program. It would not pay, for example, for an automobile manufacturer to develop cars for people who are under four feet tall. Accessible: The segment can be effectively reached and served. Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments. Actionable: Effective programs can be formulated for attracting and serving the segments.

Positioning: - The third element of the target marketing process is positioning. Positioning is arranging for a product to occupy distinctive and desirable place relative to competing products in the minds of target consumers. The idea is to give customers in the target market one or more good reasons to select your company rather than one of your rivals. Thus, marketers plan positions that distinguish their products from competing brands and give them the greatest advantage in their target markets. In positioning its products, the company first identifies possible customer value differences that provide competitive advantages upon which to build the position. Thus, effective positioning begins with differentiating the market offerings to create superior customer value. Once the company has chosen a desired position, it must take strong steps to deliver and communicate that position to target consumers.

The company's entire marketing program should support the chosen positioning strategy. For example, BMW makes the ultimate driving machine. KIA promises the power to surprise. The company can offer greater customer value either by charging lower prices than competitors do or by offering more benefits to justify higher prices. If a company promises greater value, it must deliver it. An automotive components company seeking to target Mercedes, BMW and Jaguar must seek to establish a market position based on engineering excellence and quality-a market position based simply on low cost would be entirely pointless. However establishing a low-cost position would probably be the number one priority for an automotive components firm seeking to win business from Daewoo and it rivals. This is not to say that cost is irrelevant to Mercedes and others nor that quality is irrelevant to budget car manufacturers. However, in each case they have clear priorities for the cost and quality of purchased components, based on their own selected target markets and chosen market position.

In positioning its product, the company first identifies possible competitive advantages upon which to build the position. To gain competitive advantage, the company must offer greater value to target consumers. It can do this by charging lower prices than competitors do or by offering more benefits to justify higher prices. But if the company positions the product as offering greater value, it must then deliver that greater value. Effective positioning begins with actually differentiating the company's marketing offer so that it gives consumers more value. Once the company has chosen a desired position it must take strong steps to deliver and communicate that position to target consumers. The company's entire marketing programme should support the chosen position.

RELATIONSHIP AMONG MARKET SEGMENTATION, TARGET MARKETING AND POSITIONING The three decision processes- market segmentation, target marketing and positioning are closely linked and have interdependence. All must be well considered and implemented if the firm is to be successful in managing a given product-market relationship. For example, Target marketing requires evaluating the relative attractiveness of various segments (in terms of market potential, growth rate, competitive intensity and other factors) and the firm's mission and capabilities to deliver what each segment wants, in order to choose which segments it will serve. No matter how large the firm is, its resources are usually limited compared with the number of alternative market segments available for investment which calls for market segmentation. Product positioning is often based on a set of determinant attributes (benefits) of a product that matters most to the target customers backed up with words that describe the features that actually deliver the benefits that are promised.

FACTORS THAT TRIGGER OFF MARKET SEGMENTATION Today's market realities often make segmentation imperative. Market segmentation has become increasingly important in the development of marketing strategies for several reasons. First population growth has slowed, and more product markets are maturing. This sparks more intense competition as firms seek growth via gains in market share (the situation in automobile industry) as well as in increase in brand extensions (Colgate toothbrushes, Visa traveller's checks). Second, such social and economic forces are expanding disposable incomes, higher educational levels and more awareness of the world have produced customers with more varied and sophisticated needs, tastes, and lifestyles than ever before. This has led to the outpouring of goods and services that compete with one another for the opportunity of satisfying some group of customers.

Third, there is an increasingly important trend toward micro-segmentation in which extremely small market segments are targeted. This trend has been accelerated in some industries by new technology such as computer aided design, which has enabled firms to mass-customise many products as diverse as designer jeans and cars. For example, many automobile companies are using a flexible production system that can produce different models on the same production line. This enables the company to produce cars made to order as does General Motors in the United States which is using its online presence to fine-tune its buildto-order process.

OBJECTIVES AND GAP ANALYSIS


The lower line on the chart shows how sales volume is forecast to grow on the basis of the current state of the marketing environment and the continuation of the current marketing strategy. The upper line shows the firm's objective for sales growth. Clearly, there is a growing gap between what will be achieved with current strategies and what the firm wishes to achieve. The fundamental purpose of a revised marketing strategy will be to specify the ways in which this gap can be reduced or if possible eliminated To reduce or eliminate this gap, there are two options. The first is to identify opportunities to achieve further growth within the company's current businesses (intensive growth strategies). The second is to identify opportunities to diversify either in related or unrelated areas

1. Intensive Growth Opportunities: Let us take a look at intensive growth. Intensive growth makes sense for a company if it has not fully exploited the opportunities latent in its current products and markets. We have 3 major types of intensive growth opportunities. These are: Market Penetration: Market penetration consists of the company seeking increased sales for its current products in its current markets through more aggressive marketing effort. There are 3 possibilities: (i) The company can try to stimulate current customers to increase their current rate of purchase-market growth. (ii) The company can increase its efforts to attract competitors' customersincrease market share. (iii) The company can increase its efforts to attract non-users located in its current market area.

Market Development: Market development consists of the company seeking to increase sales by taking its current products into new market segments. There are two possibilities. A market is made up of several segments (i) The company can open additional geographical markets (segments) through regional, national or international expansion. The company may be under-represented in certain cities. (ii) The company can try to attract new market segments through developing product versions that appeal to those segments, or it can market its existing products by other channels of distribution, or by advertising them in media other than the ones the company has been using to attract users not located from the existing market. The company for example, may not be well represented in their markets.

PRODUCT DEVELOPMENT: Product development consists of the company seeking increased sales by developing new or improved products for its current markets. There are 3 possibilities (i)The company can develop new product features or content through attempting to adapt, modify, magnify, minify, substitute rearrange, reverse or combine existing features. (ii)The company can create different quality versions of the product. (iii)The company can develop additional models and sizes.

No 2. EXPANSION BY DIVERSIFICATION There are four ways a company can diversify, as follows: Vertical integrative diversification Concentric or related diversification Horizontal diversification Conglomerate diversification

(a) Vertical Integrative Diversification There are 3 vertical integrative strategies (i) Backward Integration: Backward integration consists of company seeking ownership or increased control of its supply systems by acquiring a supplier (ii) Forward Integration consists of company seeking ownership or increased control of its distribution systems e.g. a firm acquiring or launching a wholesale distributor or retail outlet or a supplier of components parts for cell phone seeking to produce complete cell phone to compete with those to whom it supplied e.g. Nokia and Motorola (iii) Horizontal Integration Horizontal integration consists of a company that is seeking ownership or increased control of some of its competitors. The company doing the acquisition must make sure that it is not challenged by the govt because it lessens competition.

(b) Related or Concentric diversification: When a firm internally develops or acquires another business that does not have products or customers in common with its current businesses but that might contribute internal synergy through sharing of production facilities, brand names, R&D know how, or marketing and distribution skill. For example a university can set up a consulting house that can make use of the ability of its lecturers.

(c) Horizontal Diversification The company might search for new products that appeal to current customers even though the new products are technologically unrelated to its current product line. For example, a company that was in business of producing records that appealed to teenagers may decide to start publishing teenage magazines or make teenage clothing because of its great understanding of teenage tastes and life styles. Or the company may want to produce cassett-holding trays, even though producing them requires a different manufacturing process. Therefore, horizontal diversification occurs when a firm acquires or internally develops another business that does not have the same product in common but has the same customers in common.

(d) Conglomerate Diversification: Here, the company is seeking to add new products for new classes of customers either because such a move promises to offset some deficiency or because it represents a great environmental opportunity. Whichever is the case, the new products have no relationship with the companys current technology, products or markets. Most companies experience seasonal or cyclical fluctuations, which are costly in terms of man power, inventory carrying costs or cash flow management. These factors might lead it to look for business opportunities that have a different seasonal or cyclical pattern. Thus, we have seen that a company can systematically identify growth opportunities through application of a marketing system framework by looking first at opportunities in the current products and markets; then at opportunities in other parts of the task-marketing system and finally at relevant opportunities outside the task marketing system.

COST CONCEPT- The Experience Effect


The experience effect is concerned with the relationship between average unit cost of production and the cumulative production volume. It postulates that the firm with the greatest accumulated experience will have a unit cost advantage over its rivals. Economies of scale are concerned with the relationship between unit cost of production and production volume per time period. In many cases, the firm will find that increasing production volume will result in lower unit cost of production. While the experience effect proposes that a firm with greater cumulative experience will have a unit cost advantage over its rivals (particularly in a manufacturing industry), economies of scale refer to the cost advantage that a firm with a high current volume of production is expected to have. Firms, with higher volumes have a number of advantages over those with smaller volumes. Empirical studies have shown that each time the volume of production doubles, there is a consistent percentage reduction in average cost. For example, if there is 20% reduction in average cost for a doubling of cumulative production, then this is known as an 80% experience curve (80% = 100% - 20%).

COMPANY PORTFOLIO
Overview A major task of top management is the shaping of a business portfolio plan. At any point in time, a company consists of a portfolio of many businesses- divisions, product lines, product brands). This section examines one of the techniques used by multibusiness enterprises to analyse their portfolio of business. The technique was developed by the Boston Consulting Group (BCG). Portfolio analysis provides the managers with an overview of the long-term prospects and competitive strengths and weakness of a company's various businesses, thus enabling them to evaluate whether the portfolio is adequate from the perspective of longterm corporate growth and profitability. For example, Rockwell's portfolio in the mid-1980's was judged by management to provide the company with too few long-term growth and profit prospects.

The objective of most companies when analysing their portfolio is to identify what needs to be done to construct a balanced portfolio of business. A balanced portfolio can be defined as one that enables a company to achieve the growth and profit objectives associated with its corporate strategy without exposing the company to undue risks. If the company does not have the right balance of business in its portfolio, it needs to pursue strategies designed to correct the imbalance. Thus Rockwell acquired AllenBradley in an attempt to shift the balance of activities in its portfolio toward business with greater long-term growth and profit prospects.

After examining the portfolio technique, we shall consider the means that companies employ to change the composition of their portfolios. These means include both entry and exit strategies. Acquisition and internal venturing are alternative ways of entering new business, while divestment, liquidation, and harvest strategies are alternative ways of exiting from existing business areas. We shall also examine the factors that affect a company's choice in each situation.

THE BOSTON CONSULTING GROUP MATRIX The main objective of the Boston Consulting Group (BCG) technique is to help strategic managers identify the cash flow requirements of different businesses in their portfolio. The BCG approach involves 3 main steps: Dividing a company into strategic business units and assessing the long-term prospect of each. A company must create a SBU for each economically distinct business area that it competes in. The objective is to divide the company into the most relevant entities for planning purposes.

Comparing all SBUs of the company against each other by means of a matrix that indicates the relative prospect of each. Here, the company assesses each SBU according to two criteria; (i) The SBUs Relative Market share and (ii) The growth rate of the SBU's industry

Developing strategic business objectives with respect to each SBU (i.e. decisions are made on each SBU as to whether it will be built, held (maintained), harvested, divested or liquidated).
SBUs mean different businesses within the portfolio of business. The objective is to divide the company into relevant entities for planning.

RELATIVE MARKET SHARE The objective when identifying an SBU relative share is to establish whether that SBU's market position can be classified as a strength or a weakness. Relative market share is defined as the ratio of an SBU's market share to the market share held by the largest rival company in the industry. If an SBU has a market share of 10%, and its largest rival has 30% then, its relative market share is 10/30 or .3. It is only if an SBU is a market leader in the industry will it have a relative market share greater than 1.0. For example, if an SBU has a market share of 40% and its largest rival has a market share of 10%, then its relative market share is 40/10 = 4.0.

When an SBU has a relative market share greater than 1.0, it is assumed that the SBU is operating at furthest part, down the experience curve and therefore has a significant cost advantage over its rivals. By similar logic, an SBU with a relative market share smaller than 1.0 is assumed to be at a competitive disadvantage because it lacks the economies of scale and low cost position of the market leader, due to experience effect. So a relative market share greater than 1 can be characterised as a strength, while a relative market share smaller than 1.0 is a weakness. The BCG characterises SBUs with a relative market share greater than 1.0 as having high relative market share and SBUs with a relative market share smaller than 1.0 as having a low relative market share.

INDUSTRY GROWTH The objective, when assessing industry growth rates is to determine whether industry conditions offer opportunities for expansion, or whether they threaten the SBU (as in a declining industry). The growth rate of an SBU's industry is assessed according to whether its growth is faster or slower than that of the economy as a whole. Industries with growth rates faster than the average are characterised as having high growth. The BCG position is that high growth industries offer a more favourable competitive environment and better long-term prospects than slow growth industries. In other words, high growth industries present an opportunity, low growth industries a threat.

COMPARING ALL STRATEGIC BUSINESS UNITS (SBUs) This step involves comparing SBUs of the company against each other by means of matrix based on two dimensions of relative market share and an industry's growth rate. The diagram on the board provides the example of such matrix.

Relative Market share

The horizontal dimension measures relative market share, and the vertical dimension, an industry's growth rate. Each circle represents an SBU. The centre of each circle corresponds to the position of that SBU on the two dimensions of matrix. The size of each circle is proportionate to the sales revenue generated by each business in the company's portfolio. The bigger the circle, the larger is the size of an SBU relative to total corporate revenues. The matrix is divided into 4 cells. SBUs in cell 1 are defined as stars, in cell 2 as question marks, in cell 3 as cash cows, and in cell 4 as dogs. The BCG argues that these different types of SBUs have different long-term prospects and different implications for corporate cash flows.

STARS: Stars are the leading SBUs in the company's portfolio. They have a high relative market share and are based in high-growth industries. In the language of SWOT (strength, weakness, opportunities and threats) analysis, they have both competitive strengths and opportunities for expansion. They offer excellent long-term profit and growth opportunities. Generally, the BCG predicts that established stars are likely to be highly profitable and therefore can generate sufficient cash for their own investment needs. Emerging stars, however, may require substantial cash injections to enable them to consolidate their market lead.

QUESTION MARKS: Question marks are SBUs that are relatively weak in competitive terms, having low relative market shares. However, they are based in high-growth industries and may offer opportunities for long-term profit and growth. Question marks can become stars if nurtured properly.
To become market leaders, question marks require substantial net injection of cash; they are cash hungry. The corporate head-quarter has to decide whether a particular question mark has the potential to become a star to warrant the capital investment necessary to achieve it.

CASH COWS: Cash cows are in low-growth industries but have a high relative market share and a strong competitive position in mature industries. Their competitive strength comes from being furthest down the experience curve. They are the cost leaders in their industries. The BCG argues that this position enables such SBUs to remain profitable. However, low growth is taken to imply a lack of opportunities for future expansion. Consequently, BCG argues that the capital investment requirements of cash cows are not substantial, and thus they are shown as generating a strong positive cash flow. DOGS: Dogs are SBUs in low-growth industries but have a low relative market share. They have a weak competitive position in unattractive industries and are viewed as offering few benefits to the company. The BCG suggests that such SBUs are unlikely to generate a positive cash flow and indeed may become cash hogs. They may require substantial capital investments just to maintain their low market share while offering few prospects for future growth in returns

INVESTMENT STRATEGIES BCG recommendations include: Use the surplus from any cash cows to support the development of selected question marks and to nurture emerging stars. The longterm objective is to consolidate the position of stars and to turn favoured question marks into stars, thus making the company's portfolio to be more attractive. Question marks with the weakest or most uncertain long-term prospects are divested so that demands on the company's resources are reduced. Selected question marks should be built i.e. a strategy aimed at improved market position while the company forges short time earnings. The company should exit from any industry where the SBU is a dog by divestment, harvesting, or liquidation.

If the company lacks sufficient cash cows, stars, or question marks, it should consider acquisitions, to build a more balanced portfolio. Such a portfolio should contain enough stars and question marks to ensure a healthy growth and profit outlook for the company and enough cash cows to support the investment requirements of the stars and question marks. Weak cash cows should be harvested.

STRENGTHS AND WEAKNESSES OF BCG MATRIX


STRENGTHS: The major strength of the BCG matrix is that it focuses a company's attention on the cash flow requirements of different types of businesses and points out ways of using cash flows to optimise the value of corporate portfolio. It indicates when a company needs to add another SBU to its portfolio and when it needs to remove an SBU WEAKNESSES: Market growth rate is an inadequate descriptor of overall industry attractiveness. Market growth is not always directly related to profitability or cash flow. Some high-growth industries have never been very profitable because low entry barriers and low capital intensity have enabled supply to grow even faster, resulting in intense price competition. Also, rapid growth in one year is no guarantee that growth will continue in the following year.

Relative market share is inadequate as a description of overall competitive strength. Market share is more properly viewed as an outcome of past efforts to formulate and implement effective business unit and marketing strategies than as an indicator of enduring competitive strength. If the external environment changes or the SBUs managers change their strategy, the businesss relative market share can shift dramatically. While the matrix specifies appropriate investment strategies for each business, it provides little guidance on how best to implement those strategies. While the model suggests that a firm should invest cash in its question mark businesses, for instance, it does not consider whether there are any potential sources of competitive advantage that the business can exploit to successfully increase its share. Simply providing a business with more money does not guarantee that it will be able to improve its position within the matrix.

The model implicitly assumes all business units are independent of one another except for the flow of cash. If the assumption is inaccurate, the model can suggest some inappropriate resource allocation decisions. For instance if other SBUs depend on a dog business as a source of supplyor if they share functional activities, such as a common plant or sales force, with that businessharvesting the dog might increase the costs or reduce the effectiveness of the other SBUs.

What a Manager should do to Reap the Benefits of Portfolio Analysis while Avoiding some Short-Comings Identified? Specifying Appropriate Investment In addition to specifying appropriate investment for each SBU, a manager should also suggest ways to improve its companys position within the matrix by identifying potential sources of competitive advantages that the business can exploit to successfully increase its share since providing a business with money does not guarantee that it will be able to improve its market share A Manager Should Constantly monitor the Environment A manager should not always view relative market share as an indicator of enduring overall competitive strength but must constantly monitor the environment to identify changes that can affect his firm and make sure that the firm is well prepared to meet with these changes and revise the marketing strategy accordingly.

All Business Units May Not be Independent If the assumption that all business units are independent is found not to be correct. In other words, if other business units depend on a dog business as a source of supply or if they share functional activities such as a common plant or sales force, the manager should allow a dog business to stay and not divest , harvests nor liquidate a dog business.

Developing Strategic Business Objectives with Respect to each SBU Decisions are made on each SBU as to whether it will be built, held (maintained), harvested or divested. Build: The objective in using this strategy is to increase market share with the willingness to for-go short term earnings to achieve this goal. The strategy is particularly good for selected question marks whose shares have to grow if they are to become stars.
Hold: This is a strategy designed to preserve the market position of an SBU. This strategy is particularly appropriate for strong cash cows if they are to continue to yield a large positive cash flow and stars to consolidate their positions

Harvest: This is a strategy that aims at getting short-term increase in cash-flow regardless of long-term effect. This strategy is particularly appropriate for a weak cash cow whose future is dim and from which more cash flow is needed.
Divest: This is a strategy that aims at selling or liquidating the business because resources can be used better elsewhere. The strategy is particularly appropriate for dogs and for question marks that the company decides it cannot finance for growth.

ENTRY STRATEGIES TO CORRECT IMBALANCES As we have noted earlier, correcting imbalances in a companys corporate portfolio frequently requires entry into new business areas, adding question marks, winners or profit producers to the portfolio and exit from existing businesses that are problematic. In this section, we shall examine the means of entry into a new business area. The choice which strategic managers face is between entry through acquisition and entry through internal new venturing.

Acquisition versus Internal Venturing Entry into a new business area through acquisition involves purchasing an established company complete with all its facilities, equipment and personnel. Entry into a new business area through internal venturing involves a company starting a new business from scratch, building facilities, purchasing equipment, recruiting personnel, opening up distribution outlets, and so on.

The choice between acquisitions and internal venturing as the preferred entry strategy is influenced by a number of factors. The most important among them are: Barriers to Entry When barriers are too (substantial) much, a company finds it difficult to enter the industry through internal venturing. To do so, it may have to construct efficient scale manufacturing plant; undertake massive advertising to break down established brand loyalties and quickly build up distribution outlets- all hard to achieve and likely to involve substantial expenditure. The sources of barriers to entry arise from factors associated with product differentiation (brand loyalty) absolute cost advantages as a result of economies of scale

The Relatedness of the New Business to the Existing Business The more related a new business is to the existing companys established operations, the lower the barriers to entry because what this means is that the company has accumulated the required experience of this type of business. These factors favour internal new venturing as the entry mode. The Comparative Speed and Development Costs of the Two Entry Modes. When the speed (matters) is important, acquisition should be the favoured entry mode. The reason being that it has been found out by Ralph of University of Virginia in a study of corporate new venturing, it takes 8years for a new venture to reach profitability level and 10years before the profitability of an average new venture equals that of a mature business.

The Risks Involved in the Different Entry Modes. Failure rates are very high in new ventures. Research by Edwin of University of Pennsylvania indicated that only between 12% and 20% of R&D based new ventures actually succeed in earning economic profit. Overestimation of synergies prevail in acquisition. Industry Life Cycle Factors. In embryonic and growth industries, barriers to entry are typically lower than in mature industries since in the former, the companies are still going through a learning process.

PITFALLS OF ACQUISITION Why do many acquisitions fail? Four major reasons account for that: Companies experience difficulties when trying to integrate divergent corporate cultures. Companies overestimate the potential gains from synergy. Acquisitions tend to be very expensive Companies often do not adequately screen their acquisition targets.

ASSIGNMENTS Why do many acquisitions fail? What are the guidelines for Acquisition Success? What are the guidelines for Internal Venture Success? What are the pitfalls of Internal Venturing?

Portfolio Gaps 1. Insufficient cash cows

Entry Strategy Acquire companies in

mature industries
2. Insufficient winner (stars) Acquire established winners profit producers

3. Insufficient question marks? Or developing winners

Internal venturing in growth or embryonic industry.

WHY MANY COMPANIES FAVOUR ACQUISITION In the face of obvious difficulties of succeeding with acquisitions companies continue to use this entry mode because of the following reasons: When companies make an acquisition it is acquiring known profitability, known revenues, and known market shares. It avoids uncertainties whereas internal venturing involves establishment of a question mark business. Acquisition allows a company to buy a winner. Hence many companies favour acquisition.

EXIT STRATEGIES TO CORRECT IMBALANCES Just as building a balanced portfolio requires entry into a new business area so it also require exit from existing business areas. Exit is normally required when a company has too many (dog) losers or question marks and sometimes when it has too many developing winners. A company in dealing with exit problems has 3 choices to make as follows: divest, harvest, or liquidate. Which strategy is best in a given situation depends on 2 factors: the characteristics of the relevant industry and the characteristics of the business to be divested.

Divestment: Divestment involves selling a business to another company, or to the management of that business. Divestment makes sense if the future prospects for the business to be sold seem good i.e. if the business to be sold is a developing winner or a particular question mark. This will help it to command a high price. Divestment can be difficult to implement particularly if the prospect for the business are poor as in the case of a loser. Harvesting: A harvest exit strategy involves controlled disinvestment in a business unit to optimise cash flow as the company exits from the industry. To increase cash flow, management eliminates or severely curtails new investment, cuts maintenance of facilities, and reduces advertising and research while reaping the benefits of past good will. The effects are as follows: The business loses market share but in the short-run cash flow out of the business increases markedly

The cash generated can be invested elsewhere in the corporation Once the cash flow begins to decline, then liquidation is normally considered. Divestment is difficult because by this time the business has run down and its long-term prospects are poor. Liquidation: Liquidation involves closing down an operation. Liquidation is normally the exit of last resort. It is selected only when all other options have failed because by definition the company must take substantial write-offs on the closure of the operation and bear

ANSOFF'S GROWTH VECTOR MATRIX The Ansoff matrix itemises the four ways in which a firm can develop its portfolio of products and markets- market penetration (current products/current markets), product development (developing new product/current markets), market development (current products/new markets) and diversification (new products/new markets). Igor Ansoff (1987) suggested four growth vector's for a firm's future business- that is to say four directions that future growth could take. A firm pursuing a market penetration strategy aims to increase its market share in its existing markets and with broadly the same product range. Should this prove insufficient to achieve the firm's objectives, then it may consider a product development strategy. In the former case, new products are developed, but they are sold into markets which the firm already addresses- so much of the existing database of marketing research is relevant.

Market development means that the firm pushes into new markets, but with broadly the same products. In this case, it needs to research the new markets, but the firm understands the product technology involved. Finally, if the firm decides to enter new markets with new products, this is known as a diversification strategy. By definition, both the market and the product are unfamiliar when diversification is pursued, so that the managers of the firm have to gain experience of both new markets and new products simultaneously. In consequence, diversification can be regarded as a relatively high-risk strategy.